WAVETECH ENTERPRISES, LLC
Private Account Wealth Management Services
Newsletter Issued 03- 18- 09:
By: John T. Moir
Position overview . . .
Our previous newsletter, dated February 14th, stated that the stock market remains fundamentally bearish, as Main Street has taken to hunkering down and saving rather quickly — a determent to consumer spending and debt expansion. In past economic cycles, monetary policy worked by causing increases in borrowing, but that is not the case this time around, as systemic de-leveraging is the order of the day and will take years to evolve. We further stated that the stock market has discounted a normal recession, but we think this is anything but normal — expect long-term lower prices. We anticipated the DOW, at least for the near term, to remain within a period of consolidation, and projected a trading range for the month between 7,700 and 9,000. The actual result saw the DOW resume the primary downtrend, producing a DOW trading range for the month between 7,033 and 8,315.
We anticipated that the US treasuries could decline in price, inversely causing yields to rise, and projected a US 10-year Note base-yield for the month of 3.05%. The actual result did see the US treasuries decline in price during the course of the month, producing a US 10-year Note yield range between 3.05% and 3.47%. We also stated that the excess supply of US treasuries, at least for the near-term, could cause the US dollar to decline in value, as foreign central banks may choose to hold less of these instruments and instead protect their own currency. We, therefore, anticipated that the US dollar could decline in value, and projected a euro fx equivalent trading range for the month between $1.27 and $1.33. The actual result was a slightly stronger and higher trading range for the US dollar, between euro fx equivalent of $1.2549 and $1.3030.
Looking forward . . .
Investor confidence has been dragging and was further derailed, when the February employment report showed that non-farm payroll lost 651,000 jobs. The unemployment rate shot up to 8.1%, nearly double what it was a short two years ago, and highest since December 1983. There are now 12.5 million people out of work, and the jobless tally has grown by 4.4 million since the recession began — and by 2.6 million in the past four months alone.
The payroll losses in January and December were considerably larger than first reported, by 57,000 and 104,000, respectively. Revisions, in hard times, inevitably are for the worse, and February’s total of the involuntarily idled will likely grow.
The actual number could be revised to close to one million, if you include the 161,000 jobs of the revised count for the previous two months, the 134,000 added last month by the birth/death model and the relatively mild weather that added 107,000.
The scope of the employment decline is breathtaking and the shedding of jobs reached three of every four industries surveyed. The only sectors with even a faint pulse were education as well as health services, and the pinch that hospitals are experiencing could affect the latter in the near future.
Employment declines by two million or so, in a typical garden variety postwar recession, but in just the past five months, US employment has lost 50% more than in a classic 10-month recession.
Moreover, the job picture for March shapes up as being uglier, with 600,000-plus jobless claims; the Challenger’s layoffs tally being up 158% from a year ago; the 78,000 plunge in temporary employment; and the record loss of 800,000 jobs this month. This does not rule out a payroll shrinkage of one million jobs.
Our favorite measure of unemployment, for some time, has been U-6, which takes in everyone, including the increasingly large group of folks who are earnestly seeking work but have to settle for part-time jobs. The ratio for this category, at the end of last month, stood at 14.8%, the highest since the Bureau of Labor Statistics (BLS) started to keep tabs back in 1994. One in eleven homeowners, not the least of reasons, are either delinquent on their mortgage or in foreclosure.
The extensive deleveraging, as the credit excess and asset bubble of the last economic cycle continues to unwind, is exerting a powerful negative influence on the real economy that is far beyond most collective pundits professional or personal experience. These pundits strained to find something — anything positive to say about the February employment report.
We are currently in the grip of what practitioners of the dismal science refer to as a “negative-feedback loop,” in which the slide in asset values takes a painfully big bite out of household net worth, consumer confidence, spending, and finally, employment. The vicious process than feeds right back into more asset and credit defaults.
The US is caught in a trap, and 18 months into the credit collapse, there is no sign that the US government has adopted the policies that might stabilize things, much less turn them around.
We have our doubts on the effectiveness of the new administration’s proposals to rescue housing. They should turn their focus and energy to the seriously ailing labor market, since the next leg down in housing will likely be driven by mounting joblessness.
Long-term conclusions and current month expectations . . .
A search has started by some economists and strategists for signs that would suggest the beginning of the end, in the midst of this rapidly deteriorating economic climate — that the rate of decline is the economy is becoming less severe or the emergence of a “second derivative” type of positive evidence that could come to the rescue.
So far, the search has not produced any results. The rate of decline in activity is not abating, which will be confirmed when the first quarter 2009 earnings are released. They may show that the rate of decline in the economy has been cut in half, from 6% to around 3%, and such results may strengthen expectations that another cut in the rate of decline to 1.5% may be possible.
US real gross domestic product (GDP), if these assumptions are correct, would be down by 3.5% from mid-2008 to mid-2009, confirming the worse-than-average recession. The largest contributor to such a decline is likely to be personal-consumption expenditures, down 7.5% for the year, as households attempt to restore some of the damage done to their financial condition by increasing their savings.
We anticipate further downward adjustments in residential expenditures, and nonresidential investment expenditures will also succumb, contributing to the severity of the recession.
We know that US consumers saved the day during the last recession by borrowing and spending, but it is different this time. Not only are consumers tapped out, but they are generally in bad shape and are cutting back. This has forced the Federal Open Market Committee (FOMC), during their meeting today, to leave the Fed Funds rate at 0.00 to 0.25% and purchase an unprecedented amount of various US treasuries and US Agency instruments, which subsequently drove their respective prices higher and inversely yields lower.
The FOMC’s hope is that this action will create a wave of refinancing and increased interest in real estate, but this will all depend on the amount that mortgage rates actually decline to and the US consumers ability to qualify for either a lower adjustment in their mortgage rate or an outright new real estate purchase. We would anticipate that US treasuries will be price-supported, at least for the near-term, due to this decisive action by the FOMC, and are projecting a US 10-year Note based-yield for the month of 3.47%. These lower yields for the various US treasuries could cause the US dollar to decline in value, resulting in a euro fx equivalent trading range for the month between $1.25 and $1.35.
Thanks to globalization, internationally things are different, and the emergence of developing countries over the past 15 years have now joined the ranks of the middle class. This is a huge market, in the billions, and adds a new dimension capable of helping to boost the global economy when it needs it the most. However, at this point, it remains unclear on how the middle class will react, depending on how the situation unfolds.
The share of output attributed to consumer spending, which peaked near 71% in 2008, may decline to a level well below its long-term average of 65%. Normally, savings are a buffer to support consumption during an economic slowdown, but now consumer spending has been hit by the slowing economy plus negative-wealth effects associated with falling home values and stock prices as well as the need to replenish savings. Saving rates should return to at least the long-term average of 7%, but the return to forced saving will not pull the economy out of recession. The stock market appears to be entering a period of consolidation before resuming the primary bearish downtrend, and we are anticipating a DOW trading range for the month between 6,400 and 8,800.
The economy needs capital spending more than anything, given that capital formation is one of the key mechanisms driving long-term economic growth. There is evidence that investment spending on long-lived capital goods responds sharply to temporary tax incentives. A temporary investment tax credit would be just the prescription for a weak economy in need of capital formation. Policy makers, unfortunately, do not find this as attractive as sending out “stimulus” checks or funding “shovel-ready” projects that benefit their political constituencies. .
PRIVATE ACCOUNT WEALTH MANAGEMENT SERVICES:
We, at Wavetech Enterprises, LLC, offer our Private Account Wealth Management Services, which is a conservative, flexible, and actively managed investment strategy. Investor’s ordinary and/or tax-deferred funds remain securely in their name at major financial institutions and/or brokerage firms, while we manage them Online.
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These services are ideal for individuals, trusts, foundations and privately held corporations that have large stock, bond and/or real estate holdings and are seeking an active management service to generate a long-term average rate of return on investment between 15% to 20% per year (after fees) through either a rising or declining stock, bond or real estate market.
We operate within the “Exemption from Registration” provision provided by the Code of Federal Regulations (CFR) Title 15, Chapter 2D, Subchapter 2D, Subchapter II, Section 80b-3. This provision allows investment firms to grow their business prior to registration, and the large expenses associated with such a process. Investors’ funds remain securely in their name at major brokerage firms and/or banks, while, we, at Wavetech Enterprises, LLC., manage the funds “Online.”
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John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
Acknowledgements: Federal Data, Paul Markowski with MES Advisors, Nicocles Michas with Alexandros Partners, Aden Forecast by Mary Anne Aden and Pamela Aden, Dorsey with French, Wolf & Farr, David Rosenberg with Merrill Lynch, Liscio Report by Doug Henwood and Philippa Dunne .
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